How Do You Trade Classic Bullish Divergence & Bearish Divergence

In XAUUSD trading, classic divergence setup is used as a possible sign for a price trend reversal & it is used by XAUUSD traders when looking for an area where price could reverse & begin moving in the opposite trend direction. For this reason this classic divergence trading setup is used as a low risk entry method & also as an accurate way of exiting out of an open XAUUSD trade.

This classic divergence strategy is a low risk method to sell near the top or buy near the bottom, this makes the risk on your trades very small relative to the potential reward. However, this is one method with very many whipsaw fakeouts and most traders don't recommend using it.

Classic divergence setup in XAUUSD trading also is used to predict the optimum point at which to exit an open trade transaction. If you already have an open trade that is already profitable, a good way to spot a profit taking level would be the point where you spot this divergence trading setup.

There are two types of classic divergence - based on the direction of the Gold price trend:

Classic Bullish Divergence Setup
Classic Bearish Divergence Setup

Classic Bullish Divergence

Classic bullish divergence trading setup occurs when the price is making lower lows (LL), but the indicator is making higher lows (HL). The example below shows picture of this classic divergence set-up.

How to Trade Classic Bullish Gold Trading Divergence on Gold Charts Explained

Classic Bullish Divergence Trading Setup - Gold Chart

The example above uses MACD indicator as a the divergence trading indicator.

From the above example the price made a lower low (LL) but the trading indicator made a higher low (HL), this shows there is a divergence between the XAUUSD price and the indicator. This signal warns of a possible trend reversal.

Classic bullish divergence trading signal warns of a possible change in the XAUUSD price trend from downward to upwards. This is because even though the price moved lower the volume of sellers that moved price lower was less than before when you compare the two lows - as illustrated by the MACD technical indicator.

This indicates under-lying weakness of the downward XAUUSD trend.

Classic Bearish Divergence

Classic bearish divergence trading setup occurs when price is making a higher high (HH), but the oscillator trading is making a lower high (LH). The example below illustrates this setup of the classic bearish divergence trading setup.

How to Trade Classic Bearish Gold Trading Divergence on Gold Charts Explained - Classic Bearish XAUUSD Divergence

Classic Bearish Divergence Trading Setup - Gold Chart

The above example also uses MACD indicator

From the above example the price made a higher high (HH) but the trading indicator made a lower high (LH), this shows there is a divergence between the XAUUSD price and the indicator. This signal warns of a possible trend reversal.

Classic bearish divergence trading signal warns of a possible change in the Gold price trend from upward to downwards. This is because even though the price moved higher the volume of buyers that moved price higher was less as illustrated by MACD.

This indicates the under-lying weakness of the upward XAUUSD market trend.

In the examples above, if you had used classic divergence trading set-ups to trade you would have gotten good trading signals to enter or exit the trades at an optimal point. However, divergence trading signals just like other trading indicators is also prone to whipsaw fakeouts. That is why it's always good to confirm the divergence trading signals with other technical indicators such as RSI, MAs and Stochastic Oscillator Technical before opening a trade transaction.

A good indicator to combine classic divergence trading setup is the stochastic oscillator & wait for the stochastic lines to move in the direction of the divergence signal so that to confirm the signal.

Another good technical indicator to combine with this setup is the moving average indicator, in this trading indicator a xauusd trader should use the MA Cross over System to confirm the signal generated by the divergence trading setup.

Example of MA Crossover Method

How to Trade Classic Bullish Gold Trading Divergence & Classic Bearish Gold Divergence Combined with Moving Averages

MA Cross over Trading Method Combined with Classic Divergence Setup

Once the divergence signal is given, a trader will then wait for the Moving average cross-over method to give a trading signal in the same direction, if there is a classic bullish divergence signal, a trader will wait for the moving average crossover method to give an upwards crossover signal, while for a bearish classic divergence trading signal the trader should wait for the Moving average cross-over system to give a downward bearish crossover signal.

By combining the classic divergence trading signals with other indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic divergence trading signals, because the trader will wait til the market has actually reversed and is already moving towards the generated signal direction -hence the trader will not fall into the trap of picking market tops and market bottoms by entering transactions before the actual divergence trading setup has been confirmed.

Learn More Lessons & Courses:

Trade Gold Trading

How Do You Trade Classic Bullish Divergence & Bearish Divergence

Classic Bullish Divergence

Classic Bearish Divergence

Example of MA Crossover Method